>> from bloomberg world headquarters in new york, i'm mark crumpton. this is "bottom line." the intersection of business and economics with a main street view. to those of you around the united states and around the world, welcome. we have phil mattingly who has details on president obama's trip to saudi arabia. chief washington correspondent peter cook examines the latest numbers from the congressional budget office. we begin with a reporter

roundtable. julie hyman and chief markets correspondent scarlet fu look at today's across-the-board drop in the u.s. equity markets. julie, let me begin with you. is this weather-related? >> it is fundamental-related. people around the city talked about whether they were fully staffed and said they were. many had spent the night in the hotel and came into the office or were telecommuting from home. it seems as though volume is a normal levels. people are focusing on the news at hand and that news is largely negative. at least if you're looking at corporate news. we had a number of earnings reports after the close yesterday and early today that came in below estimates. there were a couple of important tracks things to blame, if you will, for these reports. one is the drop in commodity prices. caterpillar blamed their drop on

disappointing orders from clients in oil and gas industry notably. caterpillar shares have been trading down. we have seen a slide in copper and gold prices as well. report says that they were affected by that. -- freeport says that they were affected by that as well. the increase in the dollar is also weighing on companies who get their revenue from abroad. proctor and gamble and dupont were a couple of companies that make comments. of course, microsoft coming out with disappointing earnings compared to what analysts are looking for. all of that combining to create this weighed on stocks. >> scarlet fu, three weeks into 2015 and we have seen in up and down in equity markets. >> a lot of that today was driven by weak economic data. durable goods orders came in surprisingly we, a fourth straight month of decline

reflecting weakness in emerging markets like china but perhaps also the selloff in oil prices and what that means for energy company's willingness to spend. the question is if this weakness could spread to the u.s. and if it is a drag on growth and if it does anything with the federal reserve's decision to raise interest rates eventually. most people say the idea that the fed would look at this durable goods number or the market turmoil we are seeing and make a decision is probably overstretched. the fed is still focused on inflation and getting any kind of price increase that is sustainable to the 2% level. having said all of that, morgan stanley did push off its rate list forecast until march 2016 from january. most people looking for mid-2015 but morgan stanley was a little out there and pushed it off more. >> are we seeing any other headwinds on the horizon? >> potentially more

disappointing earnings. at least if you look in technology. microsoft has been dragged out other companies that have yet to report their numbers. apple and yahoo! would also be reporting after the close but those could go either way. i believe this is the day that is busy at by number in terms of companies reporting earnings but that will drive some of the discussion in the coming days. >> julie hyman and scarlet fu. thank you so much. for more on today's equity markets, tony dwyer equity strategist from canada cord is with me on the phone. as i mentioned to julie, what happened? are we now worried about the strength of the u.s. economy? >> it's very interesting. i am on the other side of the trade from the morgan stanley analyst. for the life of me, i cannot

understand, in a service-based economy, how a collapse in the price of oil and a collapse in interest rates while banks are lending -- a key statement -- how that could lead to slower economic activity, especially now that you have quantitative easing in japan and in the eurozone. we believe we are in a corrective mode, not because of slower economic activity in the u.s., but we will have continued growth in the u.s. and that will push forward the rate hike in april or june of this year versus next year. >> julie hyman mention the u.s. dollar. we are seeing in gain strength. that also means american good and services are more expensive overseas. have some been caught off guard by the advance? >> i'm sure they have been. the issue i have with pricing that in as a permanent fixture is, for example, the dollar is

weaker today. companies were clearly caught off guard. investors as well to some degree, but this is not a unique experience. in the mid-1990's, the dollar was screaming higher. there was a significant view that companies would suffer because of the stronger dollar but that did not stop the market s or the fed from raising rates. despite global issues at the time. we do have historical precedent for what is happening today. >> you put out a note today called seeking clarity in no man's land. you said fear of the fed is driving a correction call but you also say the usual suspects, weaker global growth, falling commodity prices, will not be to blame. then what will be? >> let's look at today's

economic data. very weak durable goods numbers. futures traded down. the bond market rallied and yields came down significantly. then you had an absolute blowout to the upside in consumer confidence. and unbelievable move higher. in other words, the service sector, the consumer, is having a change in their attitude based upon not what is happening in energy as a negative, but what is happening with oil prices when they pull up to the pump or get a mortgage. it is just cheaper. so the offset to some of the negative data in the manufacturing sector is the consumer spectrum -- sector. so this is a consumer-based economy, so ultimately we have had these global issues. we have had the greece exit from

the eu all of those things happening in russia. this has been with us for six months. and the market was at an all-time high. in order to get a fundamental correction -- remember corrections are only healthy and natural until they happen. in order to get a correction you need a change in the perception that the fed. our data supports a rate hike early in 2015. >> your target for the s&p is 2340. are your indicators to tell you that? when you add exposure, what sectors will you be looking at? >> when you are in no man's land, you're not sure about the fundamental data and the markets are not oversold to draw in buyers you have to find certain indicators that work for you. those indicators are closer to overbought than oversold. we do want to enter.

i want to be very careful about sounding too negative. the u.s. economy is still on a positive trajectory. as long as that takes place, you will have a positive trajectory in earnings. as long as that takes place, you will have a serious valuation expansion, similar to 1997. if we get that, we think the markets are historically cheap based on inflation so we are looking at earnings. i think i am current survey with a 2340 estimate. -- conservative with a 2340 estimate. >> always a pleasure, thank you for your time. coming up, the state of the u.s. housing recovery. what is ahead for the housing industry this year. anika khan, wells fargo senior economist, will join us when we continue. ♪

>> welcome back to his let's

look at the other top doors we are following. new york city escaped the worst of the so-called historic storm. the city may end up with less than a foot of snow, about half of what was forecast. still, air traffic is at a standstill. thousands of flights have been canceled. meantime, massachusetts and maine got pounded. up to two feet of snowfall may -- snow may fall there when it is all said and done. the memory the anniversary of the auschwitz concentration camp in poland today. world leaders and holocaust survivors pay tribute to the victims. 300 survivors attended the ceremony along with steven spielberg. president obama is in saudi arabia where he is paying his respects following the death of king abdullah. he will also meet with the new saudi leader king salman. they will discuss the fight against islamic state militants, and human rights.

more on the president's trip a little later. a mixed bag of economic report today. orders for capital goods dropped unexpectedly for a fourth month in a row, a sign of global economic slowdown starting to impact american companies. consumer confidence rose more than forecast in january to the highest level since august 2007. americans took part in an improving labor market and prospects for higher earnings. that is a look at our top story this hour. a mixed bag and a lot of economic data today, including the housing front. sales of new homes rose more than expected in december 2 11 point 6% while home prices rose at a slower pace of 4.3%. anika khan, wells fargo senior economist is with me now from charlotte, north carolina. welcome back. good to see you. >> thank you. good to see you as well. >> even with the next bag, are

the gains we are seeing in home prices reflective of and consistent with a housing market that is now gaining stability? >> really good question. today's report was a very good report, a solid report in the double digits. however, if we look at the 2014 number overall, it was disappointing and just a tad higher than what we saw in 2013. overall, new home sales activity. we do think 2015 is going to be a better year. >> let's examine the regional breakdown. a 54% jump in home sales in the northeastern u.s. demand was also up in the south by 18%. in the west by 3.1%. but in the midwest, sales fell by 12%. what factors led to that 54% increase in the northeast and that 12% drop in the midwest? >> on a regional basis, it is fairly difficult to look at the

numbers on a month-to-month basis. however, stepping away from the monthly trend overall, the midwest as well as the northeast, are continuing to see a slower pace of sales activity. a lot of this activity is slower because these are the areas where we are seeing slower population growth. in the west and south, we are seeing a much faster pace of population growth in those areas. i would also say, in the west, we are still seeing a large number of investor transactions, especially in those hard-hit markets, and in some markets in the south as well. >> i am speaking with anika khan, wells fargo senior economist. the share of first-time buyers fell last year, the lowest level in almost 30 years. we keep hearing economic conditions are ripe for first-time buyers. why are they having trouble getting into a home? >> first-time homebuyers the

story of 2015. we heard a lot about it last year. first-time home buyers with less than pristine credit it is still very difficult for these borrowers to get a mortgage even with the mortgage rates still very low. we will continue to watch that first-time home buyer. they are typically 40% of the market. the last existing home sales report showed that they were 31% . so we still have a long way to go. >> will the slowdown in home prices be enough to boost sales in 2015? >> the slowdown in overall home price appreciation will actually vote well for those first-time homebuyers. earlier in the housing recovery a lot of the activity was investor-led which pushed up

overall home prices into the double digits. now with prices in the single digits, we should see a little more activity. but the biggest hurdle with the low 30-year mortgage rate down below 4%, will be that a lot of those borrowers have refinanced their mortgages, which will leave them to be less inclined to put their home on the market. >> the national association of homebuilders wells fargo consumer sentiment index shows the overall industry is close to a nine-year high. where is that optimism coming from and what will conditions look like when the federal reserve finally decides to raise interest rates? >> builders, over the past three months, continue to register strong ratings in that index. that is good news for construction. we think a lot of that optimism has to do with demographics. a big number of that will be

household formations. household formation is the ability to strike out on your own. more specifically, the young adult population. we think that number will likely rise to 1.2 million this year and could be 1.5 million the following year. >> what is the u.s. housing sector, according to your research what would it look like in 2015, continued strength? >> we should see continued strength. we are fairly optimistic about 2015. we think household formation will be a positive for the housing market. we also continue to see low mortgage rates. that will be another boon. we also have an increase in inventory. that is going to be a key to this particular housing market in this next homebuying season. >> anika khan, wells fargo senior economist and joining us

from charlotte, north carolina. always a pleasure, thank you for your time. up next, we will check in with peter cook. he has been crunching the numbers from the cbo on the 2015 budget outlook. we will see if anything is new when "bottom line" continues. ♪

>> welcome back. this is "bottom line" on bloomberg television. streaming on your tablet, phone, and bloomberg.com. president obama and congressional republicans are on a collision course over the budget. next week the president will spend -- and send his pending plan to capitol hill where the republicans are working on a budget of their own.

peter cook has more on the battle ahead. peter, is the period budget calm about to come to an end? >> it is, thanks to the ryan murray budget deal in 2013, the budget control act in 2011 and which gave the sequestration, we have largely been on cruise control the last couple of years with a few minor skirmishes. today with the first major budget hearings, that is about to change. the big deal is february 2. for the first time in his presidency, he will submit a budget to congress controlled by republicans and that means that it will be ignored even more than it usually is. we know that he will ask for a 7% increase in discretionary spending above sequestration levels. that is unlikely to fly with many republicans. publications plan to pass their own nonbinding budget resolution in the house and senate by april 15. what congress divided, we have not seen a budget resolution since 2009.

it would set spending limits on congress for the next fiscal year. republicans could choose to go below sequestration levels if they want, but there are a host of people in the gop and want to see the cap and spending cap lifted. adding to that drama, that is exactly when the cbo expects the next debt ceiling deadline to hit. it should make for interesting fall. we could see the start of the battle in earnest in the summer. >> by all indications, the budget picture is brightening. wouldn't that seem to ease the pressure on both sides? >> it does. the cbo released a report yesterday showing the deficit will hit $460 billion, the lowest level of the obama presidency, and just below the historical average as a share of the economy over the last 50 years. that means that both sides are under less pressure.

the nation long-term fiscal challenges still moving around the corner and the deficit darting to rise again one .1 trillion in 2025. as soon as they can control the issues the easier those solutions for the entitlement programs, but right now there is no talk about any grand bargain. don't expect the speaker and the president to be sitting down to discuss those bigger issues with the current situation, given the lack of pressure on the deficit. >> do republicans get any sort of advantage by controlling both chambers of congress? >> absolutely. in particular you will hear a lot about reconciliation. it is a process that allows republicans to make specific changes in legislation related to the budget that only requires 51 votes. that means democrats cannot filibuster that in the senate. republicans could use reconciliation to undo obamacare or pass tax reforms to their liking. the problem is, the president can still be too any bill sent

to him under reconciliation. he still has the power here. >> coming up, we will take a look at u.s.-saudi relations as the president pays his respects following the death of king abdulla. the relationship between both nations. ♪

>> welcome back to the second half-hour of "bottom line" on bloomberg television. i'm mark crumpton. it is time now for the commodities report. su keenan has the details. >> we have oil snapping a three-day losing streak and joining golden the move higher. a lot of green on the screen in metals and energy. oil is rising partly due to a weakening dollar. we also have opec warning that prices may search with the new investment in production. the biggest gainer by far is natural gas, which continues its

wild ride, even though the blizzard of 2015 failed to live up to expectations. we are up 3% on the day. getting back to oil and gold, we have not seen the two move in the same direction lately. gold getting a boost from the weak durable goods data. also the case that the fed will push the first rate hike further out in time which tend to be bullish for gold. that decision will be out tomorrow. >> meanwhile, an important policy shift on oil drilling. what are traders saying? >> they say it continues, the success story of growing u.s. oil output. they also questioned the timing, given the fact that we have a supply glut right now. roughly five years after a bp oil spill that is still in litigation. the obama administration planning to lift restrictions on offshore drilling and an area from virginia to georgia. a move that oil companies love

environmentalists oppose it. who could forget the millions of gallons of oil that spilled into the gulf of mexico as bp struggled to contain it. more than $40 billion in cleanup and penalties. the bottom line stephen shortt says that this is a continuation of the way the obama administration was moving before the spill and sets the table for increasing u.s. output as well. >> su, thank you. u.s. officials say president obama's stop in saudi arabia today may have lasted only about four hours, but it is tough to overstate its significance. phil mattingly is with me from washington with what the administration hopes to accomplish with the president's meetings with the country's new king. >> good afternoon. it was a quick trip but heavy in symbolism. it starts with a delegation that the administration sent along with the president, including

two secretaries of state, three former national security advisers, six members of congress. there was a heavy push to underscore the u.s. reliance on this relationship on saudi arabia as an ally and on the new king, king salman and his future relationship with the u.s. there is a recognition that this relationship has not been in the best place over the last few years, and they wanted to make a heavy push symbolically and behind the scenes today to state , if not a reset, a push to make things better. >> there has been pushed back about the u.s. relying so heavily on an ally that advocates -- or has a poor human rights record. what is the administration's response to that? >> during the meetings, the president brought up human rights as an issue, but it's important to note, it is really underscored by an interview that he had with cnn where he hit on the issue directly. >> sometimes we have to balance

our need to speed to them about human rights issues with immediate concerns that we have in terms of counterterrorism or dealing with regional stability. >> what you are seeing is how the president attempts to deal with these issues not just with saudi arabia, but with a number of u.s. allies. public pressure, pressure behind the scenes, but a recognition that when it is an ally with the status of saudi arabia, there is only so much it can do. >> what are some of the issues that the relationship faces right now? >> the last couple of years, the relationship has been in a difficult spot for number of reasons. one is the inability of the administration to address some of the major concerns happening in syria. you have iran. nuclear negotiations that saudi officials are uncomfortable with. in the last two years more than $22 billion in arms sales from the u.s. to saudi arabia.

you are talking about training programs infrastructure protection, weapons systems, all of those funded by the u.s. in some shape or form. so the relationship is there, but there are issues to overcome right now and that is why you saw such a big public and private push by the administration during this visit. >> thank you. charles ebinger is a senior fellow in the energy, security, and climate initiative at the brookings institute in washington. welcome to "bottom line." thank you for your time. is the world getting closer to peak oil demand, are those concerns by the saudi's justified? >> no, we are not getting near peak oil demand. if anything, the problem in the oil market is as much oversupply as much weak demand with europe very sluggish the japanese economy still teetering with recession, the u.s. not exactly

robust but better off. countries like china and india and brazil all having much slower growth than they have had the last few years. >> how will a drop in oil prices affect how saudi arabia's new monarch deals with the domestic spending limits? >> it certainly poses challenges to king salman. but keep in mind the saudi's have huge financial reserves. most people say they could keep the price of oil where it is today and basically be ok for eight years. clearly they don't want to drive their reserves that much, but they are sending a clear message that they are tired of being the one country that is always called to cut production when the market gets soft. that is why they did not cut production this time. i think they are very upset about north american production and how we have had a huge rise with our shale oil in shale gas. i think they are sending a message that they are the low

cost producer in the world and can survive a price war better than anyone else. it is for that reason that i believe we will see lower prices from today's levels before we see higher prices. >> the international energy agency says oil prices fell 40% this year. the drop is placed -- based on record high prices related to record highs applies. will this necessarily lead to cheaper energy prices near-term? >> i think it will lead to cheaper energy prices because we still have relatively weak demand around the world. everybody is focused on supply, and that is clear. we have had huge supplies come on from north america, including canada. but really it is the demand side. until that galvanizes back upward with some kind of world economic growth coming up to levels higher than today, we are not going to see prices go up. i think we will see prices go

down. that is good for consumers but not producers. >> the head of hsbc holdings climate change center in london said in a report this month that cheaper oil might lead some countries to back off from pledges to cut carbon emissions as they lose revenue from energy taxes. is this an unintended consequence that would force some countries to look at and invest in alternative sources of energy? >> i think she is right on there. the demand, if we look 10 years out, most people say 90% of future global demand will be in asia. you have countries like india still with 300 million people with no access to any commercial energy. while they understand the difficulties of climate change as they said to the president during his visit, they are also concerned out of bringing up the standard of living for literally hundreds of millions of people around the world. so i think they will opt for

cheap oil rather than making vigorous commitments to co2 reductions. >> there was news today, we learned the u.s. department of the interior will propose oil drilling in portions of the atlantic and a five-year lease and plan scheduled to be unveiled today. that plan would control leasing in the outer continental shelf. has offshore drilling gotten safer in the years following the 2010 bp oil spill in the gulf of mexico? >> i think it has gotten safer. we have had a lot of investigative committees by the department of the interior as well as oil company interests. that does not worry me so much, but i find it incongruous that the same time that we open up the east coast, we close off portions of the arctic, where our own interior department has estimated we have 10.2 billion barrels of oil. it seems a shame to cut that off when that is so vital to the

state of alaska the health of the native community, and alaska in terms of providing jobs and revenue and certainly the states budget. i would hope the president may revisit that issue at some time. >> you talk about the native community in alaska. any concerns about the environmental impact there if the drilling were to be given the green light? >> of course there are concerns. it is a very fragile environment. we have been producing oil at root obeisance 1978. we have seen increases in the polar bear and caribou populations. i think it shows it can be done. the natives have gotten jobs, education, skills are leading a better life expectancy. there is always a danger as well as upsetting traditional ways of life. but on balance most people would agree it has been a positive even among the native community. >> charles ebinger from the

brookings institute in washington, we appreciate your expertise. >> thank you. >> up next, the latin american report and the first comment from fidel castro on a new era unfolding between the united states and cuba. stay with us. ♪

>> welcome back. this is "bottom line" on bloomberg television, streaming on her phone, tablet, and bloomberg.com. it is time for today's latin american report. the bogus the fell on speculation the dilma rousseff will undo austerity measures in order to win confidence. there were reports that she was considering giving into labor union demands.

fidel castro is lending his support to a thaw in u.s.-cuba relations. he wrote a letter published in a statement reversing that we will always cooperate their friendship -- appreciate -- it is the first public comments from the former president since president obama and raul castro announced that they would seek to improve diplomatic relations after five decades. coming up, we will take a look at today's market selloff as federal reserve officials begin their two day policy meeting.

>> there are multiple ways to watch bloomberg tv. we are on the web on bloomberg.com on your mobile device, apple tv, and amazon fire tv. the dow jones is poised for its worst trading day since october. just as federal reserve officials begin their first meeting of .15, earnings from microsoft and caterpillar are raising concerns about the u.s. economy plus strength. or more on today's selloff, trish regan is with me. i asked if it was about the weather but something else is going on. >> something else is happening clearly. we have a strong u.s. dollar contributing to some of this. it makes it harder for some of these companies to sell their goods overseas. durable goods was lacking.

you have to start to call into question exactly the health of the recovery. i have said all along, and i think it is worth considering again, how much of this recovery is real, how much is based on financial engineering and a low interest rates from the fed. companies are incentivized to do things they would not otherwise be incentivized to do, but investors are incentivized to bid up prices because the fed has been there. >> so it begs the question when everyone is talking about when the fed will raise interest rates maybe by the middle of the year, if they take away the third leg of the stool, what happens? >> i don't think they will do that. danny blanchflower will be with us today. he would agree. part of the problem is you have not seen any increase in wages. the fed is holding out for that. the one silver lining in all of this -- and we should take our in this -- is that gas prices have been declining so much --

in 28 states, below two dollars a gallon. that has a big psychological effect on people. when you look at the consumer confidence numbers, they were fantastic. the best since august 2007. let's not forget the consumer is the key to this economy, representing 20's -- 70% of gdp. maybe just maybe, this is the demand that the economy needed. maybe we will see a revved the consumer because of these prices. >> what about investor confidence? they see a day like this on wall street, what do they think? >> we are off the lows of the session. we were down about 350 and i thought we might see people come in and buy. the u.s. is effectively the only game in town. especially what is happening in europe and asia. you have a federal reserve that will likely continue printing money, continuing with this low

interest-rate environment for the foreseeable future. with the fed's help, with oil lending a helping hand, there are some things out there that would bode well. >> brian billick, the former coach of --this deflate gate will not go away. >> this story will not go away. my hometown team here. the patriots controversy will not go away. we will look at this whole issue. >> the maker of the footballs says that maybe it was atmospheric conditions. they said, sure it was. no. >> for sure, there is something going on. the nfl is taking another hit on this one. >> danny billick, danny blanchflower. see you then. stay with us. scarlet fu will have another check on the markets on the

other side of the brick. equities are off the lows of the session but we are still down on this tuesday. we will be right back.

>> get the latest headlines at the top of the hour on bloomberg radio, streaming on your tablet, and bloomberg.com. that does it for this edition of "bottom line." i'm mark crumpton. "on the markets" is next. ♪ >> it is 56 passing hour which

means bloomberg television is on the markets. what happens when the worst weather scared of the year coincides with the biggest topic line of 2015? a loss of 350 points in the dow industrials, but that has been cut in half. right now we are still off by 219 points. the vix rose to 18.41 earlier. the 10-year yield dipped below 1.9%. either way, tech companies picking up the worst performers in the stock market today. this is the tech sector exchange traded fund falling as much as 3.3% after microsoft reported sales declines in china and japan from a stronger u.s. dollar. looking ahead, with apple and yahoo! said to report in just over an hour, with me for some answers is the chief operations officer for king on the markets.

i have to start by asking whether we blame microsoft or the drop in the xlk. are they a good barometer for the sector? >> i think they are a relatively good barometer for the sector at large. you have strong exposure to the enterprise, a strong constituent of their business. what's interesting about the earning call today was that they were able to beat revenue and also posted strong gains in terms of their cloud-based services with office 365 and other offerings of the like but new windows licenses sales were less than expected. that seemed to be a key catalyst in seeing this dr. up like it did. >> we knew that tech would be heard by the stronger u.s. dollar going into this report because of tech's role in the global supply chain and the global customer base.

why was it still such a surprise? >> i don't think it was necessarily a surprise. i think it was more is a prized by what a missing you saw in terms of the windows licenses sold. just like in 2013, with the way the financials were driving the bull market, throughout 2014, the story was big tech. naturally, as tech lead the bull market in 2014, and if the market starts to turn, it will also lead any pullback. >> when we look at technology overall, at this point in the market cycle, six-year-long bull market with the economy trying to find traction, looking for inflation is technology a momentum play, is there a cyclical element to it, or are the challenges structural? >> i think it is to a degree a momentum play, but there are

also structural changes. for the last decade or so, there has been a lot of talk about the new normal for employment. a big driver of that has been technology displacing traditional jobs within the labor . now -- labor space. now that you see technology potentially slowing down, it could be the son of a larger crack in the economy overall. >> thank you, john. we will be watching those results from apple and yahoo! coming up after the bell. "street smart" is next. ♪

>> welcome to the most important power of the session. 60 minutes until the close. i am trish regan. stocks sinking but off the lows of the day. investors are concerned about the strength of the u.s. economy, reacting to disappointing earnings and a lousy durable goods orders number we got out. we have some consumer confidence numbers as well. we are counting down to earnings after the bell. apple, at&t, yahoo! all out with results. "street smart" starts now. here is a